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If you have had a checking account and/or a savings account at the same bank for a long time, you could be missing opportunities to earn higher yields or get services that make managing your finances easier.
Online-only banks have some advantages over traditional, brick-and-mortar banks, but the reverse is also true. Here are the pros and cons of each.
Pros and cons of brick-and-mortar banks
It’s easy to understand why people stick with a traditional bank. Customers build relationships with banks over the years as they reach milestones, like buying a home or a new car. Traditional banking offers a personal touch. Customers can stop by their bank and talk to someone who can access their accounts and answer questions. To many people, this is more assuring than dealing with a machine.
Depositing cash is easy to do at a physical bank, but it’s not possible with an online bank unless it is linked to ATMs that accept cash. Most traditional banks have large ATM networks that customers can access locally and in other parts of the country or even the world. Many traditional banks also offer a top-notch online and mobile banking experience with sophisticated websites, mobile apps and other digital tools.
Besides checking and savings accounts, traditional banks offer mortgages, mortgage refinancing, auto loans, credit cards and other products. The downside is, traditional banks typically charge more for loans and services and offer lower yields on savings accounts, certificates of deposit (CDs) and other interest-bearing accounts.
High fees, low rates
Fees are the biggest drawback of brick-and-mortar banks, which have more overhead than online-only institutions. Bankrate’s 2021 checking account and ATM fee study found that the average fee for an interest checking account is $16.35, while the average minimum balance required to avoid a fee is a whopping $9,897. Then there are overdraft fees, ATM fees if you use another bank’s machines, paper statement fees and a host of other charges that traditional banks levy.
Traditional banks also typically pay lower rates on deposits. Bankrate’s latest survey found that the average rate on a savings account is only 0.1 percent, whereas you can find online banks paying 1.2 percent or more. Likewise, with CDs, the average rate on a one-year CD is 0.42 percent, whereas some online banks are paying 2 percent or higher.
Pros of brick-and-mortar banks:
- Convenience and assurance of personal service and support.
- Access to a big ATM network and a wide variety of products and services, such as home and auto loans, credit cards and safe deposit boxes.
- In addition to personal banking, some offer commercial banking and investment management services with branch-based business bankers or financial advisors.
- Many of the big, traditional banks offer safe, sophisticated online banking and mobile banking.
- You can deposit cash.
- Federally insured banks protect your deposits up to $250,000 per depositor, per FDIC-insured bank, per ownership category.
Cons of brick-and-mortar banks:
- They charge higher fees and have a wide variety of them.
- Loans and other products may cost more.
- They pay lower yields on savings and other deposit products.
- Visiting a branch takes longer than banking online.
Pros and cons of online-only banks
Some consumers stay with brick-and-mortar banks because they’re afraid to conduct financial business online. They fear having their money or identities stolen. The Federal Deposit Insurance Corp. and the National Credit Union Share Insurance Fund provide the same coverage of customer deposits at online banks and credit unions as they do for brick-and-mortar institutions. And most banks, online and traditional, use strong encryption, multifactor authentication and require strong passwords to protect customers’ personal information.
Because they don’t have branch buildings to maintain and have lower staff costs, online banks typically pay higher interest rates on deposits. Let’s say you have $5,000 saved and plan to not touch it for five years. If the bank paid 0.1 percent, with interest compounding monthly, you would earn $25.20, for a total of $5,025.20 at the end of the five years. If you put that money in a savings account at an online bank paying 1.2 percent, with interest compounding monthly, you would earn $309.07, for a total of $5,309.07 after five years.
Online banks generally outshine brick-and-mortar banks when it comes to loan costs. Some online banks are offering personal loans for below 6 percent, whereas the average rate for a personal loan at a traditional bank is 10.58 percent, Bankrate’s latest survey shows. It’s possible to find online lenders that charge no fees whatsoever. Marcus by Goldman Sachs, for example, charges no fees on its personal loans. Online banks, however, do not have as wide a variety of products as traditional banks.
Online banks make the customer experience pretty seamless. It takes less time to open an account online than it does inside a branch. Online banks make it easy to transfer money into and out of your accounts — and many come with apps that allow you to do your banking on a mobile device, such as a smartphone.
Impersonal service, limited options
Of course, there are downsides to online banks. Most don’t have physical branches, and customer service is provided electronically via FAQs on the bank website, emails, chatbots and sometimes by phone. Having no human contact can be frustrating for customers who need assistance.
Not every transaction is instant with online banks. If you deposit a check using your bank’s mobile app, for example, you may have to wait a few days for the transaction to be posted. Wire transfers and ACH transfers also can take time, which is inconvenient if you need money in a hurry. And you can’t deposit cash in an online bank unless the bank is connected to an ATM network that accepts cash.
Finally, an online bank may not have a big ATM network, and you may end up paying high fees to use other banks’ ATMs.
Pros of online banks:
- They generally charge lower fees or no fees for their products and services.
- They typically pay more interest on deposits.
- Online banking is a big time-saver that lets you avoid trips to the bank and waiting in drive-thru lanes or lobby lines.
- Most have safe, sophisticated websites that make it easy to open an account, pay bills, and track and manage your money from anywhere.
- Federally insured online banks protect your deposits up to $250,000 per depositor, per FDIC-insured bank, per ownership category.
Cons of online banks:
- There may be no one to talk to. Customer service can be virtual and impersonal. It’s hard to even find a phone number on some bank websites.
- You are more likely to incur ATM fees if the online bank has no ATM network or is part of a small network.
- You can’t deposit cash unless the bank is linked to ATMs that accept cash.
- They aren’t a good fit for everyone. People who rarely use computers or don’t have a reliable internet connection are not good candidates for online banking.
You don’t have to choose between a brick-and-mortar bank and an online bank. You can have the best of both worlds by keeping your checking account and ATM usage with your local, traditional bank and opening a high-yield savings account or CD with an online bank.
It can be worthwhile to compare fees, rates and other features at three to four banks before you open a new account.